How free drug policy will redefine health insurance

Insurers may be burning their fingers in urban health portfolios for some time now, but the government's rural healthcare initiatives, including its decision to provide free generic drugs to public hospitals, are set to offer fresh avenues of growth for them.

The recent government decision to provide free generic drugs to government hospitals at an expense of $5.4 billion (Rs 29, 820 crore) could be a game-changer for the health insurance business in India.

While insurers suffer a high claim ratio in urban centres, in excess of 100 per cent, the cost of health insurance in rural centres is expected to come down with the new regulation.

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The cost of a generic drug is 80 to 85 per cent lower than the branded product, according to data from the US Food and Drug Administration. In case of health insurance, medicines account for 15-20 per cent of healthcare costs.

This component is higher in rural areas, which generally have poor hospitalisation facilities. Also, in the case of several critical diseases, the cost of medicines is much higher than the hospitalisation cost.

"If the government decides to provide free generic drugs to hospitals, the impact will be huge, and the cost of health insurance would come down by a few times. The cost of branded medicines in health insurance is huge," said Kuldip Singh, director and general manager, National Insurance Co Ltd.

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Notably, a number of government-sponsored micro-insurance schemes have quietly changed the landscape of health insurance.

A Planning Commission document, dated January 31, 2011, states three major schemes (Rashtriya Swasthya Bima Yojana (RSBY), Rajiv Aarogyasri and Kalaignar) have in as many years covered roughly 247 million, a fifth of India's population.

"Comparatively, the breadth of the coverage is by any global standards quite breathtaking and has occurred at a rapid rate in a span of three years, and this feat could be achieved even among the vulnerable population and informal workers, where the penetration has been difficult till recently," the document said.

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This is in contrast to urban health insurance schemes, where insurers are being forced to raise premium due to high claim ratio.

Recently, the finance ministry had asked four general insurance companies -- New India Assurance Co Ltd, United India Insurance Co Ltd, National Insurance and Oriental Insurance Co Ltd -- to reduce losses in the group health insurance segment by increasing premium.

The net combined losses of the four insurance companies on group health insurance were estimated at Rs 1,500 crore (Rs 15 billion) in 2011-12. Group health insurance schemes constitute more than 50 per cent of the health insurance business of most public sector companies.

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While in group insurance schemes the claim ratio is often as high as 150 per cent, in government-sponsored schemes it ranges from 95 to 100 per cent, said an executive of an insurance company, requesting anonymity.

"The way forward for health insurance could be to tap the rural segment, as the penetration is low and profit margins are better," the executive said.

It is the mix and variation of rural micro-insurance policy that gives insurers a profit margin.

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For example in RSBY, the variation in burnout ratio (evolved specifically for the schemes) is reported to be in the range of 27 -136 per cent in a large number of districts.

"This is given the fact that in several districts the utilisation rate of hospitals is extremely low. Commercial insurers are obviously making usurious profits," said the Planning Commission document.

At present, 80 per cent of all health expenditure in the country is spent through personal resources. This is despite an increase in premium from Rs 519 crore (Rs 5.19 billion) in 2000-01 to Rs 9,944 crore (19 times) in 2010-11.

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"The health insurance segment is expected to grow at 30-35 per cent. If the government decides to provide generic, instead of branded, drugs, it will help in reducing the claim ratio. However, it has to be clubbed with other supply chain initiatives," said Samir Bali of Accenture.

Added P V S Lakshmi Prasad, deputy general manager, United India Insurance: "In rural centres, the move to provide free generic drug will definitely bring down the cost of insurance, but most claims in health insurance still come from private hospitals."